There are many factors to consider when you’re deciding whether to rent or buy a home as a retired senior citizen. You’ll be working with a fixed income so you’ll need to make smart decisions that will allow you to stretch your income comfortably over your retirement years. It can be overwhelming trying to figure out which option is best for your situation, but by considering your lifestyle needs, health, and future plans, and crunching some numbers specific to your situation, you can make a decision that will let you enjoy your retirement to the fullest.

Steps

Part 1

Determining Your Priorities

1

Consider how long you plan to stay. One of the first things you should take into consideration when you’re deciding whether to rent or buy a home after retiring is how long you plan to stay. The shorter the stay, the fewer benefits you’ll receive from buying a new home. As a general rule, if you plan to stay in your new home less than three or four years, renting is going to be a better option.[1]

2

Think about your must-haves. No matter which option you decide on, you will want to make sure you have all the things you want and need in your new home. Make a list of your must-haves and ensure wherever you decide to move includes all of these things.[2]

For example, if you’ve owned a home for the majority of your adult life, you are probably used to every day luxuries that don’t necessarily come with renting. Your must-have list might include a big backyard, the freedom to decorate however you want, or a garden out back. You might not be able to keep all of these things by renting.

On the other hand, you may be looking to downsize, cut back on your responsibilities, or allow yourself the flexibility to travel. If this is the case, renting might be a good option.

Just like you have a list of must-haves for your new home, you might also have a list of things you don’t want to deal with anymore. Perhaps you’re looking forward to having a landlord to take care of home repairs and landscaping, for example. Or, maybe you are looking forward to having fixed monthly housing expenses. Renting could be a good option for you. While renting may come with fewer amenities, it also comes with fewer responsibilities.[3]

3

Evaluate your health. Another consideration in whether you should buy or rent once you retire is your health. Your health can affect such things as your ability to maintain a home, your predicted medical expenses in future years, and the possibility that you may have to move to an assisted living facility eventually.

For instance, if you are in good health, taking care of repairs and maintenance might not be an issue if you own your own home. However, if you are not in the best of health, having to take care of these repairs might be too much to handle.

You must also consider what kind of cash flow you’ll need for health issues, keeping in mind that this amount will probably increase over the years, your last five to seven years of retirement being the most expensive.[4]

4

Think about leaving an inheritance. For many retirees, whether or not they want to leave an inheritance behind for their children or grandchildren plays a big part in the decision to rent or buy. If you plan to leave an inheritance, buying a house can help you build equity and increase the amount you can leave to your loved ones. If you don’t plan to leave an inheritance, however, renting may be a better choice.[5]

Part 2

Figuring Out Your Budget

1

Determine your sources of retirement income. Your retirement income will come from a number of different places. To figure out your budget for retirement, you’ll need to determine all the sources from which you will receive income while you’re retired. Check all of the following possible income sources:

Social Security—provided by the federal government, this income accumulates over your working years

Defined benefit pension—provided by your employer, this income is based on the amount of time you worked for your employer, what you earned over those years, and the age at which you retired. Check with your employer’s human resources department to find out how much pension income you’ll receive.

Defined contribution plan—most commonly a 401k, this income source is a plan offered by your employer into which you can invest your own money. Many employers will match a portion of your investment, but unlike a defined benefit pension, there is no guarantee from your employer as to how much you’ll receive in retirement. What you receive will depend on how much you invest, where it was invested and how long you’ve had the plan.

Home equity—if you own your home it will build equity over time. You can use this equity in retirement by selling your home or obtaining a reverse mortgage.[6]

Savings and investments—these are your personally-owned savings accounts and investments, like stocks, bonds, and IRAs.[7]

2

Collect financial information. It is imperative that you figure out a realistic retirement budget to help you in making the decision to rent or buy. Once you figure out your overall retirement budget, you can decide on a housing budget. Begin by gathering any pertinent materials and information, such as:

Identify your fixed expenses. Using one of the highlighters, go back through your bank statements and credit card statements and mark any fixed expenses. This includes any recurring monthly, quarterly, or yearly payments. For an even more effective budget, break your fixed expenses down into three groups, using a different color highlighter to mark each group:

Don’t forget to identify any changes in health care expenses, including dental, vision, and hearing insurance costs. Once you’re retired, your previous employer most likely will no longer cover any of your health care premiums.[9]

4

Add optional expenses. Think about how your spending will change after retirement. Once you’re retired, you’ll likely have more time to do the things you enjoy, like traveling, golf, or going to the spa. These items will be considered optional expenses in your budget. Be sure you adjust your predicted spending to include any increase in these activities.[10]

5

Calculate your fixed versus flexible expenses. You’ll need to figure out how much you’ll be spending on fixed expenses to determine how much free money you’ll have for your optional expenses. You can then tweak your budget and find places to save if you’d like more money for flexible expenses. To determine your fixed expenses, do the following:

Add up your total expenses.

Add up your fixed expenses.

Divide your fixed expenses into your total expenses. The answer will tell you how much of your retirement income will go toward fixed expenses, which will include any housing costs.[11]

6

Determine your annual housing budget. Once you’ve figured out your overall budget and annual budget for your retirement, calculate a housing budget to help you in making the decision to rent or buy. Professional opinions vary some, but in general, the experts suggest spending between 15 and 20 percent of your annual budget on housing, whether you’re renting or buying.[12] Asses this number in relation to your fixed expenses. Is it feasible to pay this amount on housing and still be able to stick to your budget?

If the number you come up with is not feasible, tweak your budget to find places you can save money and cut back on spending.

7

Consult a financial planner. If this all seems pretty confusing, that’s because it can be. While you can calculate a ballpark figure yourself, consulting with a financial planner will be a huge help in figuring out the specifics of your situation. A financial planner can not only help you determine your budget, but can also give you guidance on how and when to tap your assets in order to get the most out of your retirement funds.

Write out a list of questions before meeting with your financial planner. This will help ensure you get all the information you need and thoroughly explore your options.

Some questions to include could be, “How can I get the most out of my retirement income?” “How can I plan for unexpected expenses?” and “Are there other ways I can increase my retirement income?”

Part 3

Choosing Your New Home

1

Consider location. You may want to relocate once you retire to be closer to family or to live in a warmer climate. Choosing where to live can be tricky because there are many things to consider in this decision. In addition, the cost to rent or buy, which is a very important variable in retirement, will change depending on what part of the country you are in. Some things to consider when choosing a location include:

Generally, renting is cheaper than buying on either coast, and buying is usually cheaper than renting in the middle of the country.[13]

Are there quality health care facilities close by?

Are all the recreational activities you want to participate in during retirement available?

Do you want to move closer to family?

Are you considering part-time work? If so, look for places with a low unemployment rate and a growing economy.[14]

2

Discuss your options with your significant other and family. You must also take your significant other’s and family’s needs and wants into consideration when choosing a house. Talk to them about what their must-haves are and where they would like to live.

Ask your significant other questions like, “Where do you see us living after retirement?” “What would you like to do more of when you retire?” or “What are your top three must-haves for our new home?”

If you are planning on moving closer to family, be sure to discuss boundaries. For example, while your children and grandchildren will no doubt love having you closer, moving into the same neighborhood as them might be too close.

3

Find a good realtor. Once you’ve narrowed down where you’d like to live, you’ll need a good realtor to help you find places that fit into your budget and needs. Most importantly, you need an experienced real estate agent who is ethical and knows the area well. When looking for a real estate agent, do the following:

Ask for referrals or look for them online. Good realtors will have plenty of satisfied customers that are happy to tout their abilities.

Do an Internet search for the top real estate companies in the area and check their employees’ bios and reviews to get an idea which realtor might be a good fit for you.

Ask for referrals from other real estate professionals. If you have a great realtor in your current location, ask them if they know of any good realtors in your new location. Professionals are usually happy to refer clients to capable associates.

There is a difference between a realtor and a real estate agent. Realtors belong to the National Association of Realtors and pledge to follow a Code of Ethics. Real estate agents, however, make no such pledge.[15]

4

View properties. Whether you’re thinking about renting or buying, you’ll want to be thorough when viewing any potential properties. Spend time going through the whole house and make notes about what you like, what you don’t like, and any concerns or issues you noticed. To help you determine whether or not this house is a good fit for you, consider the following:

Is anything in the house damp? Is the building structurally sound? Are the window frames in good shape? How old is the roof and is it intact?

Is there enough storage space? Are the rooms spacious enough for your needs? Are there enough electrical outlets? And are they in good condition? What’s the neighborhood like?[16]

5

Calculate monthly homeownership costs. When it comes down to it, actually crunching the numbers might give you the best idea of whether renting or buying is most suitable for you (financially at least). Once you’ve narrowed your search down to a few homes, calculate your monthly homeownership costs. To do so, you must take into consideration the transaction costs of buying a home, property insurance and taxes, maintenance and repair costs, homeowners insurance, and the opportunity cost of tying up your money in the purchase of a new home. This can be extremely tricky and will vary depending on factors like where you buy your home and the current status of the housing market, but you can use the following numbers as a general guide:

As a general rule, experts say you can expect to spend about $834 per month in homeownership costs for every $100,000 in your houses value. For example, a $300,000 house would produce monthly ownership costs of around $2,500 ($834 x 3). The numbers in this example were calculated assuming the homeowners would be in their house for 10 years.[17]

6

Determine monthly rental costs. Because there are few additional costs to renting, such as maintenance and repairs, taxes, and so on, determining your monthly rental costs is pretty straightforward. These costs will simply be the amount you will to pay in rent every month.[18]

Keep in mind your lifestyle needs and wants when looking for a suitable rental.

Also consider that the cost of renting generally goes up year after year, so you will probably not be paying the same rate 10 years down the road.[19]

7

Compare costs. Once you’ve determined the monthly cost of both owning your own home and renting, compare the two to figure out which is the cheaper option. For example, a $300,000 home could generate ownership costs of around $2,500 per month. If you can find a home that costs less than $2,500 per month to rent, renting might be the better option for you.

Figuring out the cost of owning a home versus renting can be confusing. Luckily, online mortgage calculators and rent-vs.-buy tools can make this much easier. The New York Times has an excellent online rent-vs.-buy tool that you can use to help you make these decisions.[20]

8

Consider the pros and cons of each. Renting and buying both have financial pros and cons that you must think about as well. Just because renting is the cheaper option doesn’t necessarily mean it’s the best option for you, and vice versa. Consider the pros and cons of each to help determine which solution makes the most sense for you.

Home ownership pros: you can usually get more for your money and you can build equity[21]

Home ownership cons: entails financial risk like fluctuations in market value and inflation, you are responsible for repair and maintenance costs, and your monthly costs are likely to fluctuate[22]

Renting pros: amount paid in rent won’t fluctuate from month to month, the landlord takes care of repair and general maintenance costs, and renting frees up money for your to invest or use on other expenses[23]

Renting cons: rent will likely increase over time and there is no offsetting increase in equity when you rent your home like there is when you buy[24]